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Pension transfer report demand at 'staggering' levels

Prudential has recorded an eightfold increase in demand for its defined benefit transfer value analysis report (TVAS) service over the last two years, in trends that reflect an industry-wide surge.

The revelations came after the Financial Conduct Authority issued a warning to advice firms about defined benefit transfers, stating a number of firms were failing to meet regulatory standards.

Prudential informed FTAdviser that, as of January 2017, it was completing more than 800 TVAS reports a month, based on a six month average.

That compared with an average of just over 100 a month in 2014.

Pension freedoms - which gave those aged 55 plus the option for the first time to withdraw all of their retirement pot as they wished - were introduced in April 2015.

However those in defined benefit schemes have to transfer their pots into a defined contribution scheme to take advantage of the rule change.

Anyone who wants to transfer out of a defined benefit scheme must complete a TVAS report.

Stan Hughes, pension expert at Prudential, described the increase in demand as "quite staggering", adding that November last year saw a particularly dramatic spike.

"In the year of the 2014 budget when pension freedoms were first announced, we were running around 120 TVAS reports a month," he said.

"In November last year, we did 1,049 in one month."

A TVAS report calculates the "critical yield" needed from a personal pension to match the guaranteed income DB scheme members are giving up.

However, not everyone who has a TVAS report prepared goes through with the transfer.

In addition to the inheritance tax advantages allowed by pension freedoms - where if the fund holder dies before age 75 a beneficiary can inherit some or all of the fund as a lump sum, or income from drawdown, tax free, up to the lifetime allowance of £1.25m - Mr Hughes said demand was being driven by record high transfer values.

He said he had recently seen a transfer value that was 48 times the value of the annual pension.

That would mean that, if the member in question transferred out of their defined benefit scheme into a defined contribution scheme or a drawdown fund that only matched inflation, they would be able to pay themselves an equivalent income for 48 years before running out of money.

"People are getting these lottery numbers thrown at them. Then they run the TVAS report and all of a sudden, the critical yield that last year they might have been unsure about has now come down significantly, and so they're thinking, 'Let's have another look at this.'"

However, he said even with multiples of 48, transferring out was not always the sensible option.

"If somebody was quite young - in their 30s or 40s - and they got a transfer value of that size, it's a long time before you can actually take the money. So you've got to make sure you don't lose it.